Hiring your children to work for your company can be rewarding. However, you should comply with the set laws when employing them. Children under 14 years can’t be employed unless there’s an explicit exemption provided in federal law. Kids below 16 years employed in a non-agricultural setting in a business that you, the parents, solely own can work for any amount of hours and at any time of the day.
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You can hire them to work in your farm in any occupation, provided it isn’t dangerous, for unlimited hours. However, you cannot employ your child in mining, manufacturing, roofing, and other hazardous jobs. This article outlines six reasons to hire your children.
1. It’s tax-smart
Hiring your children as your company’s legitimate employees is an excellent tax strategy. You can subtract their salaries as a business expense from your organization’s income. Additionally, if your children are below 18, you won’t need to pay or withhold any Medicare or Social Security (FICA) tax on the earnings, subject to multiple exceptions. This lets you take a portion of your company income from its tax bracket to the children’s tax bracket, resulting in significant tax savings.
Your children will pay tax on the salaries they get from you only if it exceeds a year’s standard deduction amount. The standard deduction for 2022 was $12,950 for a single taxpayer. This means a child can earn up to this amount and owe zero tax. Since the IRS understands the tax rewards of employing kids, they’re keen on catching taxpayers claiming the rewards without hiring them.
To reap the tax benefits of hiring your children, ensure they’re bona fide employees and that their compensation is reasonable. You should also comply with employer legal requirements when hiring your children.
2. Make retirement savings
Individual retirement accounts (IRAs) are excellent saving tools for people of any age. Your children, regardless of age, can contribute to an IRA as long as they’ve earned an income (all taxable wages and income from owning a business or working as employees). IRAs can help your children save for their first home, retirement, or education costs. IRA contributions can’t surpass a minor’s income, and for 2023, they can only contribute a maximum of $6,500 per year.
Roth and traditional IRAs are suitable for kids as the funds grow tax-free. However, saving on a Roth account is more beneficial because your child can withdraw the money years later without paying income tax. The money also has no RMDs (required minimum distributions).
3. Teach them how to run their businesses
Running your own business involves creating your own identity and developing a range of experiences, skills, and talents that can assist to succeed throughout life. Running a business comes with many responsibilities. Letting your child learn how to handle these responsibilities is valuable. This makes the tasks less intimidating and teaches the child how to use task trackers, schedules, and any other resource to keep an eye on all that needs their attention.
Hiring your children can teach them how to engage professionally, boosting their ability to exchange information and interact with others effectively. It also teaches them resilience and endurance and exposes them to continuous learning. The lessons they acquire from working with you teach them how to run their businesses successfully.
4. Give your children financial education
Hiring and paying your children allows you to give them real-world financial education. It lets you teach them how to use their income to cater to some of their expenses or invest in assets or other areas. Depending on their age, you can teach them how to manage business finances, creating a great professional growth opportunity.
5. Plan succession
If you want to retire soon, hiring your children can help them learn and give them the experience and skills they need to take. It gives you trust in the infrastructure for sustaining the company even when you aren’t at the helm.
6. Flexibility to handle business challenges
A family business is more likely to overcome challenges as family members are willing and ready to sacrifice more when challenges arise. For instance, if you’re facing a cash flow issue, your children can do with little or no pay until the situation improves.
Employing your children can be rewarding for them and your business. You can hire them to respond to customer emails, answer calls, help with office work, care for plants around the office, run errands, help with bookkeeping and basic accounting, edit videos, draft correspondences, clean company cars, and other duties they can handle.
Consider hiring your children to enjoy the rewards of working with them.